Oxford Putting The Band Back Together
By Jeff Weinstein, Editor in Chief -- Hotels, 11/30/2008 11:00:00 PM
John Rutledge, president and CEO for the Oxford Capital Group, Chicago, and managing director for Oxford Capital Partners, leads the real estate, private equity and asset management company devoted primarily to the lodging/hospitality/leisure sector and senior housing. One of the group’s most recent acquisitions was a portion of the landmark 52-story IBM Building in Chicago for US$46 million. Oxford plans to convert floors 2 through 13 into a luxury hotel. For now, however, the focus has shifted to intense asset management and, eventually, the contrarian buyers will be looking for busted deals and distressed assets for acquisition. Rutledge talked to HOTELS’ Investment Outlook in early November about his outlook for hotel real estate and when it might be time to jump back in as a buyer.
HIO: What is your current vision of market conditions?
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Rutledge: Clearly, we are seeing performance softening across the country. The market held up remarkably well through August… In 2009, RevPAR will be flat to down as much as 5% to 7%, depending on the market and asset, of course. The upside, generally speaking, is flat.
HIO: Are you a net buyer or seller right now?
Rutledge: We have been opportunistic contrarian buyers in two waves—at the tail end of the distress in the early 1990s and after the dot-com bubble burst. I see a third buying spree evolving—just not yet, as it will get worse before it gets better. The bottom of 2009 or beginning of 2010 still might be a little early. My guess is mid-2009 and mid-2011 will see unprecedented opportunities to buy notes as well as real estate. Buying opportunities will be across the spectrum—from major urban areas, group hotels, and transient, from upper mid-scale to luxury. We have two primary strategies: high value-added redevelopment opportunities in major markets from upper mid-scale to luxury, and more stabilized extended-stay in strong secondary markets.
HIO: What is Oxford’s strategy to weather this storm?
Rutledge: We are not selling now. We are a private company and in times of distress we are treating this similar to 9/11—hunkering down for heavy storms. Our operations team is tightening expenses closely and preparing for material additional softening on the revenue side.
We are asking our operations team to look at consolidating positions, be selective about repairs and maintenance, hiring. We are scrutinizing with a fine-toothed comb—from monitoring food costs closer to renegotiating insurance and energy plans.
We are also being aggressive with guerilla marketing—being creative and original in our thinking and execution on the public relations as well as sales side. We are placing more direct emphasis on sales activity versus strategic marketing such as asking sales teams to go back over last five years of business booked and aggressively recall each of those pieces of business and find a creative way to induce them again. We are developing unique-themed holiday parties—not so luxurious but fun.
HIO: Where do you stand on holding room rate versus driving revenue?
Rutledge: I am a University of Chicago finance-trained guy and the market speaks at the end of the day. In my mind, the market sets the price and you strike a balance between rate and occupancy. At some level, you have to drive revenue for hotels. You have to watch the market to find where bid-ask hits come together as one. I like to give our teams flexibility to drive demand. We hold rate where we can, but we need to drive revenue. If you need to go through opaque channels, so be it. We are investors and during lean times adjustment must be made to drive flow-throughs. Revenue managers have to be sophisticated and entrepreneurial.
HIO: What is your take on M&A and development going forward?
Rutledge: I don’t think there will be any ground-up or conversion financing in any material way for the next 24 months. There will be exceptions, but any significant development will be highly challenged… The brand pipelines will fall off dramatically. Some will get local banks to fund local deals for select-service, but even local banks are being protective of capital… Until a few months ago, select foreign capital was coming into the market, and there is still some of that, but everyone dealing with financial contagions now and there will be even fewer investors in the near term.
HIO: What will turn around this financial crisis?
Rutledge: The U.S. government is making most of the right moves; there should have been quicker interest rate reductions and lending of capital to banks. The process has been more staggered and unfolded slower than it should have. But the global liquidity squeeze and the ramifications haven’t played out.
Massive deleveraging has to happen. We have been on a global liquidity binge since 9/11 and we have been on a secular liquidity binge since Ronald Reagan was president (25 years ago). Now things have to deflate and will over-deflate. I expect tough sledding for a few more years and look at 2012 for a good meaningful recovery.
Most smart investors are asset managing judicially and pre-negotiating extensions with existing lenders to navigate the storm. We are putting the band back together for another major buying spree, but it is still too early.
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